Key Points
Standard artificial intelligence models can quickly drain enterprise IT budgets by burning expensive compute tokens on simple, easily searchable queries.
Intapp’s Celeste platform combats this "token shock" by routing complex questions to AI and standard factual queries to traditional, cost-effective databases.
With a trailing free cash flow margin of 25% and rising, the company is translating its sticky customer base into serious cash profits.
The genius of Intapp's (NASDAQ:INTA) "compliant AI" for law firms isn't just what it knows. It's what it refuses to say when you're not supposed to have access to sensitive information.
Keeping walled-off partners away from confidential data is a fantastic defensive moat. But after chatting with CEO John Hall this week, I realized that the company has an underappreciated offensive playbook, too. Intapp can save firms from their own skyrocketing IT bills.
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Stop wasting expensive compute on cheap questions
Standard AI can be wildly expensive when people treat it like a magic 8-ball.
"All of the new AI companies bounce every question off the model," Hall said. "People ask the model what the weather is going to be, and they spend a ton of tokens and money answering that question when that question is freely available on the internet."
I know, right? You can ask Claude or ChatGPT to take a few seconds and a handful of AI tokens to generate a weather report. But what's the point when many services simply grab that info from weather databases, in turn powered by specialized systems and experts in the field? AI doesn't have to reinvent every wheel, especially when it comes to regulated firms analyzing sensitive data. And it's usually a lot cheaper to grab the quicker, more reliable answer.
Image source: Getty Images.
Intapp's secret weapon: Ruthless token efficiency
Intapp owns the "Firm AI" (billing, compliance, deal flow) while partners like the Harvey software own the "Practice AI" (drafting individual legal briefs). They aren't competing; they are ruling different halves of the same kingdom.
The company's Celeste service filters the incoming data requests in several ways. Access rights are the obvious pass, and many AI tools don't even try. Then, Intapp separates the questions that need deep AI analysis from the solved issues with proven answers available elsewhere. That could be one of the querying firm's own databases, or a contract analysis in Harvey, or perhaps a simple web search targeting a trusted site.
No need to spend a ton of tokens for the simple stuff. These savings add up. I'm sure you've heard about ride-sharing giant Uber (NYSE:UBER) consuming its annual AI budget in four months or Meta Platforms (NASDAQ:META) spending $50,000 per employee on agentic AI tokens. Uber and Meta aren't classic Intapp clients, but their legal departments could use Celeste's token-pinching features to keep running while other departments run low on AI juice.
"Now that firms have had some time to work with these first-generation AI tools, they're coming to realize how inefficient they are in token burn and how high their token spend is," Hall noted. This structural efficiency provides a vital financial cushion for chief information officers looking to control ballooning compute costs. This is another major selling point, paired with strict data access controls for protected information.
70% gross margins and a fast-growing cloud moat
The first-quarter financials prove this token-efficient model is humming. Sure, legacy license revenue cratered 21% last quarter, but that's actually a bullish signal. Clients are intentionally shrinking their old on-premises contracts so they can ditch the old data center and migrate to the modern cloud with easy long-distance access (but not too easy) and lower maintenance costs.
As a result, Intapp's cloud-based annual recurring revenue jumped 28% year over year to $515.3 million. Total sales were exactly $600 million over the last four quarters, so the conversion to cloud services is nearly complete. Revenue growth is strong and predictable, while the trailing free cash flow margin is 25% -- and rising.
Intapp's stock can be volatile. A beta of 0.33 means share prices often move up when Wall Street is down, and vice versa. But it trades at just 20 times forward earnings estimates (which means analysts expect positive earnings next year). Thanks to fat 70.5% gross margins, a ridiculous 114.8% return on equity, and a product that literally pays for itself in saved token burn, betting on the boring back-office of law firms is starting to look like a beautiful long-term trade.
Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Intapp and Meta Platforms. The Motley Fool recommends Uber Technologies. The Motley Fool has a disclosure policy.